More Roundtable Musings: The IPO Problem

At one point during the VCJ roundtable there is some spot-on musing about the effect of the absent IPO market for venture-backed companies. As a panelist pointed out, the last five years have shown why the venture market is not scalable: The amount of money being put into venture-backed companies has soared, while the IPO market remains flat (or down, depending on where you put your start point). At double the current IPO rate it will take 50 years to get the exits LPs are implicitly expecting. Ouch.

All of this, of course, has turned the venture business into a search for M&A exits. And that might work, were it not for the amount of money being managed by most funds. Because struggling for singles and doubles in a $270m fund that exists solely for the odd home run — a high-value IPO — is a triumph of self-delusion. A big bucks venture business built around M&A is, as one panelist put it, a mediocre asset class, at best.


  1. “A big bucks venture business built around M&A is, as one panelist put it, a mediocre asset class, at best.”
    As usual, great stuff!

  2. What’s the definition of “mediocre” and “home run” here? Software acquisition multiples have been high and going up. As has the volume of deals. Software seems to be where most tech VC money tends to be focused (versus services or hardware). So I don’t see M&A being such a bad option for an exit.
    Are VCs pitching their LPs on 1999 multiples for publicly traded companies as their expected ROI?

  3. AJ — Mediocre, in this context, is 2-3x, assuming normal amounts of venture money in, i.e., on the order of $7m. A home run is 7-10x, or more, which predates the 1999 exit market and has been a longstanding near-requirement for the venture business.
    Given the usual portfolio die-off funnel, it takes those kinds of multiples to pay the way for so many dead and walking wounded investments.
    Finally, while software multiples aren’t bad, the deeper challenge lately has been building businesses with large enough revenue streams to produce something material on which to deliver that multiple.

  4. I’ve found 2-3x Revenue to be “single” and “double” terrtiory for $10M+ enterprise value software acquisition deals. 7-10 seems like low but not zero probablitily multiple home run range. So are you saying those multiples are still too low for VCs to meet the return objectives they sell their LPs on?
    That last challenge seems to be the fundamental challenge for any exit. Large net income and EBITDA streams would be even better! Neither the public market nor M&A buyers seem very interested in breakeven or unprofitable opportunities.